Managing Industrial Property PDF

13 Managing Industrial Property Learning Objectives After completing this lesson, students should be able to… Compare general purpose, special purpose, and single purpose buildings Define an industrial park D...

13 Managing Industrial Property Learning Objectives After completing this lesson, students should be able to… Compare general purpose, special purpose, and single purpose buildings Define an industrial park Discuss the importance of tax rates in management planning for industrial property Define foreign trade zones and how they impact industrial property Contrast resource oriented industries with footloose industries Explain the role of industrial brokers in the leasing process Discuss the importance of an escalation clause in an industrial lease Identify the operations and reporting issues unique to industrial property management Suggested Lesson Plan 1. Give students Exercise 13.1 to review the previous chapter, “Managing Retail Property.” 2. Provide a brief overview of Chapter 13, “Managing Industrial Property,” and review the learning objectives for the chapter. © 2021 Rockwell Publishing  Property Management Instructor Materials 3. Present lesson content: Types of Industrial Property – Use of the building – Single-tenant vs. multi-tenant buildings – Separate parcel vs. industrial parks EXERCISE 13.2 General purpose, special purpose, or single purpose buildings Management Planning for Industrial Property – Sources of data – Regional analysis – Neighborhood analysis – Property analysis – Market analysis – Analysis of alternatives EXERCISE 13.3 Types of industry EXERCISE 13.4 Property analysis for industrial properties Marketing Industrial Property – Using leasing agents – Property listing – Prequalifying tenants Leasing Industrial Property – Negotiations – Lease provisions EXERCISE 13.5 Lease provisions Operations and Reporting – Maintenance – Security – Reports to owner 4. End lesson with Chapter 13 Quiz. Chapter 13 Outline: Managing Industrial Property I. Types of Industrial Property A. Industrial property: property used for the production, storage, and distribu- tion of products 2  Chapter 13: Managing Industrial Property 1. Production involves transforming raw materials into products (refining and manufacturing) or assembling components into products (fabrication) 2. Storage means the warehousing of raw materials or products 3. Distribution refers to the packaging and transporting of products B. Industrial property may be classified in three ways: by the use of the build- ing, by whether the building is single- or multi-tenant, and by whether the property is freestanding or part of an industrial park C. The main criterion for classifying industrial property is by use; buildings may be considered general purpose, special purpose, or single purple 1. General purpose buildings are used for warehousing, research, assembly, and even light manufacturing when the tenant doesn’t need a heavy-duty structure or specialized or high-volume utilities a. Shell buildings: single-story, high-ceilinged structures that have little or no interior finishing; usually found in industrial parks 2. Special purpose buildings are only suitable for a single category of use a. Includes buildings that can handle heavy manufacturing because they have reinforced floors and walls that support heavy machinery b. Warehouses are usually general purpose but may be special purpose if they have a special environment, such as those needed to store flammable or toxic chemicals or refrigerated foods 3. Single purpose buildings have extremely limited uses and are often us- able by only one tenant; examples include water treatment plants or grain silos a. Investors may construct the building on behalf of the tenant because of the capital required to build such a specialized facility. b. Alternatively, the industrial user may build the facility then arrange a sale-leaseback: an arrangement in which a business sells the property it owns (and uses) to an investor and becomes the new owner’s ten- ant; the tenant uses the proceeds from the sale to fund operations c. Ground lease: an arrangement where a business (often industrial) leases raw land from the owner on a long-term basis (a few decades or more) and then builds its own specialized facilities on the land D. Buildings may be classified as either single-tenant or multi-tenant E. There is also a distinction between industrial buildings located on separate parcels of land versus those that are part of an industrial park 1. Industrial park: a preplanned development that contains industrial build- ings and sometimes office buildings as well 2. Most industrial parks are organized as subdivisions a. One owner may own and manage the entire park, leasing out indi- vidual buildings or parts of buildings to tenants 3  Property Management Instructor Materials b. Alternatively, the condominium form of subdivision may be used, in which the owners of various buildings are members of an owners association; the association may hire a property management firm to help them manage the common areas EXERCISE 13.2 General purpose, special purpose, or single purpose buildings II. Management Planning for Industrial Property A. Sources of data include business newspapers and journals, the Chamber of Com- merce, and trade associations 1. Information about traffic and planned road construction can be obtained from city, county, and state transportation offices 2. Demographic information for labor-intensive industries can be obtained from U.S. Census data 3. The “Comparative Statistics of Industrial and Office Real Estate Markets” re- leased by the Society of Industrial and Office REALTORS® has information about industrial property vacancy rates, rent amounts, sale prices, and some infor- mation on expenses B. The industrial regional analysis examines area demographics, economic conditions, transportation, utilities, tax rates, and potential business incentives 1. Industrial firms need to know about the area’s employment and turnover rates, education (skills training), income, average age, major occupations, and (in some areas) degree of unionization a. Labor intensive industry: an industry that employs a relatively large number of workers for a given amount of space 2. The economic analysis considers prices, health of area industries, the general business outlook, and current and predicted employment rates and wages 3. The transportation analysis should evaluate the quality of the region’s road, air- port, port, and railroad infrastructure, and give an estimate of what the future holds for local transportation 4. The regional analysis should assess the ability of local utility companies to ser- vice the needs of potential tenants, as well as review utility rates a. Footloose industry: an industry that doesn’t need to locate near particular resources, energy sources, transportation centers, or markets b. Resource oriented: an industry that needs to locate near the source of raw materials, components, or other supplies to reduce the cost of transportation c. Energy oriented: an industry that chooses a location near inexpensive elec- tricity or plentiful water d. Transportation oriented: an industry that engages in volume shipping, requir- ing a location near railways, highways, airports, or ports e. Market oriented: an industry that needs to locate near consumers of its prod- ucts because the business sells heavy or bulky products and a good location reduces transportation costs 4  Chapter 13: Managing Industrial Property 5. Three categories of taxes to examine are business taxes, property taxes, and personal income taxes, because tax rates vary from area to area and affect a busi- ness’s choice of location 6. Government business incentives: tax relief and other incentives offered by state or local governments to court industry and other businesses, such as financing as- sistance and regulatory easing a. The federal government offers various tax incentives to encourage industrial development, particularly to industries favored by public policy, such as wind farms and other alternative energy producers b. Foreign trade zones (FTZs): geographical areas where the government pro- vides tax relief to importing and exporting industries C. Neighborhood analysis for industrial property: zoning, access to transportation, and municipal services are especially important 1. Most cities and counties have at least two or three classes of industrial zones, such as: light industrial (clean assembly, research and development); medium industrial (warehouses, woodworking, construction yards); and heavy industrial (refining, cement plants, plastics and other manufacturing) a. Areas zoned for heavy industry usually allow lighter industries b. Zoning boards occasionally grant exceptions (called variances) to zoning restrictions 2. The manager should consider transportation issues in the neighborhood around the managed property, such as winding roads, low overpasses, or other problems that may hamper trucks 3. Industrial tenants need to know whether the municipality (or private companies) can handle the particular kind of waste they produce, regarding both type and vol- ume; cost is also a factor D. The property analysis considers the building’s square footage, ceiling height and structural requirements, plumbing and wiring capacity, fire safety systems, shipping and receiving facilities, and parking E. In the market analysis, finding comparable properties for most light industrial and warehouse space is fairly easy; finding comparables for special and single purpose properties is more difficult F. The analysis of alternatives considers cosmetic upgrades, increasing or decreasing parking, improving paved areas, and freight facility improvements; more serious alternatives include a change of use EXERCISE 13.3 Types of industry EXERCISE 13.4 Property analysis for industrial properties 5  Property Management Instructor Materials III. Marketing Industrial Property A. A leasing agent (rather than the manager) usually handles marketing and leasing of industrial property 1. Industrial broker: a leasing agent who specializes in industrial properties 2. Many industrial properties are extremely specialized, so finding tenants for unique properties usually requires a broad geographical search, often national or even international B. An industrial property listing is usually quite basic 1. The listing information includes the location, a photo or two (a street view and, for larger properties, an aerial shot), and a handful of basic facts about the prop- erty C. The manager or leasing agent should prequalify prospective tenants before showing the property 1. Prequalifying involves a financial analysis of the prospect’s business to determine ability to pay rent, and an evaluation of the prospect’s business operations 2. Prequalification is especially important because industrial tenants usually have a long-term lease and will install expensive equipment and/or modify the premises IV. Leasing Industrial Property A. Leasing may be handled by a commercial broker or by the manager B. A leasing team usually handles lease negotiation for larger industrial properties 1. The leasing team may include the leasing agent, the property manager, the owner, and usually accountants and lawyers as well; an environmental expert may also be needed C. Some of the more important industrial lease provisions involve the lease term, rent and pass-throughs, use restrictions, inspections, insurance, and environmental matters 1. Lease terms for ordinary industrial property often last at least ten years and fre- quently longer a. Longer lease terms give owners and tenants time to recover their investments in equipment and modifications b. Owners and tenants of single use properties tend to agree to extremely long lease terms, usually many decades 2. Industrial leases are usually fully net: the landlord passes the property’s taxes, insurance, and maintenance costs on to the tenant a. Industrial tenants usually have very high utility bills, so utilities are metered and paid directly by the tenant b. An industrial lease is sometimes an industrial gross lease: a lease in which the tenant pays a flat rent for the first year (the base year); in subsequent years, the tenant pays the landlord’s operating expenses to the degree they have increased since the base year 6  Chapter 13: Managing Industrial Property c. Rent is usually based on the space’s rentable square footage, but may be a flat amount d. Most industrial leases contain a rent escalation clause because of the long lease term; the rent increase is either a pre-set amount or a floating amount equal to the increase in inflation 3. Use restriction: a lease clause limiting the tenant’s use of the property; for ex- ample, for a warehouse building, a use restriction limits the tenant to “warehouse uses” 4. The lease may contain a provision allowing the manager to inspect the property to ensure that the tenant is complying with the use clause, and also environmen- tal, zoning, and other laws 5. Because of the high risk of fire and accidents on industrial property, the lease should state types of insurance coverage the tenant will obtain and in what amounts a. Relevant policies include pollution liability, property and casualty, workers’ compensation, boiler and machinery, business interruption, commercial auto- motive, and commercial general liability b. The insurance provision should require the tenant to provide proof of insur- ance 6. The provision on environmental matters often prohibits or limits the tenant’s use of environmentally hazardous materials and dictates handling requirements a. In addition, it may contain an indemnification clause in which the tenant promises to pay the owner’s legal costs and any resulting fines or damages in the event of a lawsuit or regulatory action b. The lease should contain a monitoring process to help prevent environmental issues from happening EXERCISE 13.5 Lease provisions V. Operations and Reporting A. Maintenance responsibility varies based on the type of property 1. In a multi-tenant building, the manager takes responsibility for common areas, including the roof and building exterior 2. In a single-tenant building that isn’t part of an industrial park, the tenant may be responsible for all maintenance 3. In an industrial park, management usually has responsibility for maintaining the building exterior and grounds B. Security issues include warehouses that are attractive to thieves, vents and skylights that may provide access to the building, and unlocked freight loading facilities 1. Most industrial properties hire security guards to patrol the premises 7  Property Management Instructor Materials C. In addition to the normal reports to the owner, the manager of industrial property may have to report the discovery of environmental damage to the property 1. This report may also detail ongoing efforts to comply with monitoring and clean- up requirements imposed by federal and state environmental agencies Exercises EXERCISE 13.1 Review exercise To review Chapter 12, “Managing Retail Property,” classify each of the retailers below according to the following standard categories: Anchor Specialty Restaurant Service 1. Nail salon 2. Fast food outlet on a pad outside the main mall 3. A luxury steakhouse on the second floor of the mall 4. Jewelry store 5. Athletic shoe store 6. Major upscale department store 7. Bank 8. Large discount chain department store 9. Food court tenants Answers: 1. SERVICE 2. RESTAURANT 3. RESTAURANT 4. SPECIALTY 5. SPECIALTY 6. ANCHOR 7. SERVICE 8. ANCHOR 9. RESTAURANT 8  Chapter 13: Managing Industrial Property EXERCISE 13.2 General purpose, special purpose, or single purpose buildings Classify each of the following industrial buildings as either general purpose, special purpose, or single purpose. 1. Warehouse in foreign trade zone used for storing automobiles. 2. Light manufacturing facility in an industrial park. 3. Insulated warehouse with climate control, used for storing perishable foodstuffs. 4. Manufacturing facility with heavy duty wiring and plumbing throughout. 5. Shell building built on spec in an industrial park. 6. Pump house built as part of collecting pond, open at bottom for pumps to move water directly in and out of pond. 7. Dairy barn with concrete ramps and pens for moving and holding cows. 8. Modest-sized shop space used by a maker of wooden toys. Answers: (Note: these categories are useful for quickly giving someone a sense of a property; the classifications are general and reasonable minds might disagree on how to classify certain properties.) 1. GENERAL PURPOSE. A warehouse used for storing automobiles could be used for storing almost anything. 2. GENERAL PURPOSE. Buildings used for light manufacturing are considered general purpose. 3. SPECIAL PURPOSE. An insulated warehouse with climate control could be used for storing a variety of sensitive products. 4. SPECIAL PURPOSE. Many industries could take advantage of a facility with heavy duty wiring and plumbing. 5. GENERAL PURPOSE. Shell buildings are classed as general purpose. 6. SINGLE PURPOSE. A building open at the bottom into a pool is clearly useful only for pumping water. 7. SINGLE PURPOSE. Only a dairy could make use of this type of barn. 8. GENERAL PURPOSE. Light duty woodworking is light manufacturing, so this build- ing is probably general purpose. 9  Property Management Instructor Materials EXERCISE 13.3 Types of industry Fill in the blanks by choosing from the following terms: Transportation oriented Footloose Resource oriented Labor intensive Market oriented Energy oriented 1. A ____________ industry employs a relatively large number of workers for the amount of space occupied. 2. An industry that needs to locate near the source of raw materials, components, or other supplies is ____________. 3. A strictly online retailer would be considered a ____________ industry because it doesn’t need to locate near particular resources, energy sources, transportation centers, or markets. 4. A certain business is ____________; this means it must locate near consumers of its products. 5. An industry that needs a location near inexpensive electricity or plentiful water is ____________. 6. A distribution company that handles shipping throughout the U.S. for foreign clients and requires locations near railways, highways, airports, and ports is ____________. Answers: 1. LABOR INTENSIVE. A labor intensive industry employs a large number of workers for the amount of space occupied. 2. RESOURCE ORIENTED. A resource oriented industry locates near the source of raw materials, components, or other supplies used by the business. 3. FOOTLOOSE. A footloose industry doesn’t need to locate anywhere in particular. 4. MARKET ORIENTED. A market oriented industry seeks locations near consumers of its products. 5. ENERGY ORIENTED. An energy oriented industry can’t compete well unless located near inexpensive electricity or plentiful water. 6. TRANSPORTATION ORIENTED. A transportation oriented business requires loca- tions near railways, highways, airports, or ports. 10  Chapter 13: Managing Industrial Property EXERCISE 13.4 Property analysis for industrial properties Marcus is performing a property analysis as part of a management plan for an indus- trial warehouse mainly used by the tenant for medium-term storage of goods that require year-round inside temperatures of about 60 to 75 degrees. The warehouse does not contain offices. Which of the following issues would likely get attention as important and which would be treated as less important? 1. Parking lot (somewhat small) 2. Fire venting system 3. Look of lobby 4. Curb appeal 5. Electrical service quality 6. Management janitorial services 7. Loading docks 8. Views 9. Ceiling height 10. Grounds Answers: 1. LESS IMPORTANT. This type of tenant wouldn’t employ a great number of workers so almost any parking lot is apt to be adequate. 2. IMPORTANT. Most industrial tenants want quality fire prevention technology. Most stored goods are vulnerable to fire. 3. LESS IMPORTANT. Warehouse tenants don’t typically have customers visit a storage warehouse so lobby appeal won’t matter much. 4. LESS IMPORTANT. Warehouse tenants don’t typically have customers visit a ware- house so the building’s curb appeal won’t matter much. 5. IMPORTANT. The HVAC system is important for the kind of storage taking place on this property and reliable HVAC requires quality electrical service. 6. LESS IMPORTANT. Most industrial tenants handle janitorial services themselves. In any case, a medium- or long-term storage warehouse wouldn’t require much janitorial work. 7. IMPORTANT. All warehouses need adequate loading docks. 8. LESS IMPORTANT. Warehouse tenants don’t care much about views. 9. IMPORTANT. Higher ceilings mean more space for storage, the central purpose of a warehouse. 10. LESS IMPORTANT. As with views, nice looking grounds aren’t likely to matter much with this kind of property. 11  Property Management Instructor Materials EXERCISE 13.5 Lease Provisions For each lease provision listed, have your students call out which phrase should be circled as best characterizing industrial leases. 1. Lease length: few years, many years, month-to-month 2. Use restriction: forbidding office use, limiting competition within industrial park, limiting use of toxics 3. Maintenance: owner will handle all janitorial, tenant will handle some janitorial, tenant will handle most building maintenance 4. Insurance: pollution liability, plate glass coverage, errors and omissions policy 5. Inspections: tenant will inspect premises regularly, landlord will inspect premises regularly, inspections not typically addressed 6. Rent: percentage, mainly net, gross Answers: 1. Lease length: many years. Most industries invest considerable resources in their facility and require a long lease term to recoup their investment. 2. Use restriction: limiting use of toxics. Industrial landlords are generally concerned about liability for toxic waste; they don’t usually worry about competition among tenants or whether there’s an office on the premises. 3. Maintenance: tenant will handle most building maintenance. Many industrial ten- ants maintain their entire premises, though this may be less true in office parks. 4. Insurance: pollution liability. Industrial tenants often use hazardous materials and the landlord must protect herself from liability for environmental damage in vari- ous ways, including by making sure the tenant has insurance. Industrial tenants usually have little or no plate glass, and errors and omissions insurance is not of particular concern with industry. 5. Inspections: landlord will inspect premises regularly. Because of the danger of environmental damage and also harm to the premises caused by heavy industrial uses, the landlord typically insists on the right to inspect the premises periodically. 6. Rent: mainly net. Most industrial leases pass operating costs through to the tenant. 12  Chapter 13: Managing Industrial Property Chapter 13 Quiz 1. In which way is industrial property manage- 5. A type of industry that is not labor-intensive is: ment more challenging than other forms of a) clothing manufacturing property management? b) electronics assembly a) Lease terms are longer, meaning less turn- c) fish packing over d) oil refining b) Little build-out work is required at the start of a lease 6. A footloose industry is one that: c) Tenants are likelier to create environmental problems a) is under few constraints about its location, d) Tenants handle maintenance and repairs on and tends to locate based on quality of life their own b) must locate in an area with cheap, plentiful unskilled labor c) must locate near sources of raw materials 2. A warehouse that is occupied by only one d) must locate near transportation arteries company and does not have any specialized features for handling particular kinds of freight would be considered a: 7. Boardman Lumber is planning to develop a new lumber mill. Its main priority is to locate a) general purpose building in a town that’s near large, accessible stands of b) multi-tenant building timber, to save on the costs of transporting raw c) single purpose building logs to the mill. What kind of industry does this d) special purpose building describe? a) Energy oriented 3. Century Fabrication leases 10 acres in the New b) Labor oriented Town Industrial Park for a 99-year term, and c) Market oriented builds its own specialized building, accom- d) Resource oriented modating its heavy and unique machinery, on the land. This describes a: 8. Which of the following taxes is a local or state a) general purpose building government not likely to waive or reduce, in b) ground lease order to attract new industrial development and c) sale-leaseback the jobs that go with it? d) tax-deferred exchange a) Inventory tax b) Personal property tax, such as on industrial 4. The Sun Vista Industrial Park is organized in equipment a manner where companies will own parcels c) Real property taxes within the park. They also are members of an d) Worker’s compensation tax owners association and pay dues to the asso- ciation, which employs a manager to oversee upkeep of the park’s streets, grounds, and other 9. The advantage of a foreign trade zone (FTZ) common areas. The park is organized as a: is that: a) condominium a) employers can pay employees less than the b) cooperative legal minimum wage c) joint venture b) environmental regulations may be relaxed d) municipality c) merchandise shipped to foreign countries is exempt from duty payments d) non-citizens may be employed 13  Property Management Instructor Materials 10. An area is zoned “medium industrial.” Which 15. Which of the following is a characteristic of an of the following activities would be allowed in industrial gross lease? this zone? a) It includes a percentage of the tenant’s gross a) Light assembly only sales b) Light assembly, warehousing b) The tenant pays a base rent in the first year, c) Light assembly, warehousing, refining but pays for increases in operating expenses d) Refining only in subsequent years c) The tenant will not pay any of the landlord’s operating expenses at any point 11. A property manager describes an industrial d) The tenant will pay for electricity, but only property in terms of the amount of space the if the tenant’s space is separately metered tenant can actually occupy in the building. It does not include common building areas, or stairwells, elevators shafts, or equipment 16. An industrial tenant will probably be required rooms. This is the building’s: by the lease to obtain all of these forms of a) gross leasable area insurance, except: b) rentable square footage a) commercial general liability c) total square footage b) errors and omissions d) usable square footage c) pollution liability d) property and casualty 12. Marketing and lease negotiations for an indus- trial property are typically handled by a/an: 17. Many environmental laws are _____ laws, a) industrial broker meaning that a property owner may be liable b) leasing agent for cleanup costs even if he didn’t cause the c) property manager contamination himself. d) Both A and B a) in personam b) post facto c) strict liability 13. A typical listing for a general purpose indus- d) vicarious liability trial property will include all of the following, except: a) ceiling height 18. The most common reason for special report- b) information on loading facilities ing by a manager of industrial property to the c) previous tenant’s business owner is: d) square footage a) changes in property tax rates or procedures b) discovery of environmental damage to the property 14. All of the following are reasons that industrial c) new pass-through charges for maintenance leases are typically very long-term, except: and utilities a) finding a replacement tenant for a special- d) theft or other crime on the property ized property is not difficult b) finding a similar special purpose property can be hard for a tenant c) owner is likely to make serious upgrades to property d) tenant is likely to install large, expensive equipment 14  Chapter 13: Managing Industrial Property 19. Xyrogonomix is a biotech firm that owns its own research facility, but needs to raise a lot of capital quickly to meet legal expenses. It de- cides to sell the research building to an investor, but then lease it back from the investor so they don’t need to move. This is an example of a: a) ground lease b) sale-leaseback c) straw-man transaction d) 1031 exchange 20. A market oriented industry is one that must locate near: a) inexpensive utilities b) its customers c) natural resources d) transportation infrastructure 15  Property Management Instructor Materials Answer Key 1. c) Industrial tenants are likelier than other 7. d) A resource oriented industry is one types of commercial tenants to create that needs to locate near the source of environmental problems through their raw materials because of transporta- manufacturing processes or the types tion costs. For instance, a lumber mill of materials they handle. The other op- needs to be near a source of timber. tions all are ways in which industrial property management can be less com- 8. d) Property taxes, either on real property plicated. or personal property, may be lowered or eliminated for targeted industrial 2. a) A general purpose building can be employers. used for a variety of warehousing or light manufacturing activities, without 9. c) Foreign trade zones are not subject having specialized systems or struc- to U.S. Customs controls, so goods tures. shipped to foreign countries from them are not subject to duty payments; in 3. b) When a special purpose building is addition, goods may be stored there needed, a ground lease is often used, without being subject to inventory where the tenant simply leases the taxes. ground and constructs its own building according to its needs. 10. b) Clean assembly and warehousing would be allowed in a district zoned 4. a) The industrial park is organized as a “medium industrial”; refining would condominium: companies based in the not. Areas zoned for heavy industry park own individual lots but also own will also allow lighter industries within shared interests in the park’s common the zone, so both clean assembly and areas, for which they pay maintenance warehousing would be allowed. fees to an owners’ association. 11. d) Usable square footage is the amount 5. d) Oil refining is not labor-intensive; of space a tenant can actually occupy most of the space at an oil refinery is with its people and equipment; it is taken up by processing equipment, less than the rentable square footage, with few people present to monitor in the same building. it. Clothing and electronics manufac- turing, and food processing, are all 12. a) An industrial broker—a type of leas- hands-on jobs requiring a lot of em- ing agent who specializes in industrial ployees working closely together. property—is usually used to lease in- dustrial property, rather than having the 6. a) A footloose industry doesn’t need property manager do it (who probably to locate near utilities, resources, or doesn’t have the nationwide connec- transportation nodes; hypothetically, it tions to look for the right tenant). could locate wherever it chose. 16  Chapter 13: Managing Industrial Property 13. c) The use to which the previous tenant 19. b) In a sale-leaseback, a commercial ten- put an industrial property is not likely ant sells a property to an investor, but to be discussed in the property listing; continues to use the property, paying since it’s general purpose, the tenant rent to that investor under a long-term will take possession of a stripped- lease. down building that can be put to many different uses. 20. b) A market oriented industry is one where production facilities should be 14. a) One reason that industrial leases tend located near the customer base, in or- to be for long terms, of ten years or der to reduce transportation costs for more, is because of the difficulty heavy or bulky items. in finding new tenants for a special purpose building, where the pool of tenants who might find the building useful is very small. 15. b) In an industrial gross lease, the lease is a true gross lease in the first year, with the tenant paying just a base rent. In following years, the tenant pays increases in the owner’s operating ex- penses beyond the amount established in the base year. 16. b) Errors and omissions insurance is relevant for service professionals, protecting them against claims of pro- fessional malpractice. That would not be relevant for an industrial tenant, however. 17. c) Some environmental laws (like CER- CLA) are strict liability laws, meaning that a landowner who didn’t cause any pollution may still be responsible for costs of cleaning up pollution. 18. b) Environmental laws have cleanup pro- cedures that must be followed closely, and strict reporting requirements. It would be best to keep an owner fre- quently apprised, if a manager of an industrial property must get involved in that process. 17  Property Management Instructor Materials PowerPoint Thumbnails Use the following thumbnails of our PowerPoint presentation to make your lecture notes. Property Management Lesson 13: Managing Industrial Property © 2021 Rockwell Publishing 1 Introduction This lesson covers industrial property: ⚫ types of properties ⚫ management planning ⚫ marketing ⚫ leasing ⚫ operations and reporting © 2021 Rockwell Publishing 2 Introduction Industrial property: Property used for production, storage, and distribution of products. ⚫ Production: transforming raw materials into products (refining and manufacturing). ⚫ Storage: warehousing of products or raw materials. ⚫ Distribution: packaging and transporting of products. © 2021 Rockwell Publishing 3 18  Chapter 13: Managing Industrial Property Introduction Industrial property can be easier to manage: ⚫ longer leases (less turnover) ⚫ less need for build-out ⚫ industrial tenants handle own maintenance © 2021 Rockwell Publishing 4 Types of Industrial Property Three basic ways to classify industrial property: ⚫ how the building is used ⚫ whether the building is single- or multi-tenant ⚫ whether property is free-standing or part of industrial park © 2021 Rockwell Publishing 5 Types of Industrial Property Use of building Buildings may be considered: ⚫ general purpose ⚫ special purpose ⚫ single purpose © 2021 Rockwell Publishing 6 19  Property Management Instructor Materials Use of Building General purpose buildings General purpose buildings may be used for: ⚫ warehousing ⚫ research ⚫ assembly ⚫ light manufacturing Used when heavy-duty structure and special utilities unnecessary. © 2021 Rockwell Publishing 7 Use of Building General purpose buildings In most regions, general purpose buildings are most common type of industrial property. ⚫ Majority of shell buildings fall into this category. ⚫ Shell building: single-story, high-ceilinged structure with little or no interior finishing. ⚫ Usually built in industrial parks. ⚫ Often built “on spec” (without tenants lined up). © 2021 Rockwell Publishing 8 Use of Building Special purpose buildings Special purpose buildings suited for only a single category of use. ⚫ Also known as special use buildings. ⚫ Includes buildings that can handle heavy manufacturing (reinforced floors/walls, high-volume electrical service). ⚫ May include warehouses that control humidity or provide refrigeration. © 2021 Rockwell Publishing 9 20  Chapter 13: Managing Industrial Property Use of Building Single purpose buildings Single purpose buildings: ⚫ have very limited use ⚫ may only be useful to a single tenant Examples include: ⚫ utility company buildings ⚫ grain silos ⚫ airplane hangars © 2021 Rockwell Publishing 10 Use of Building Single purpose buildings User may own building, or investor may construct building on behalf of tenant. User may also build facility and arrange sale- leaseback: Arrangement in which business sells property it owns (and uses) to investor and becomes the new owner’s tenant. ⚫ Money from sale used to fund operations. ⚫ Tenant receives long-term lease. © 2021 Rockwell Publishing 11 Use of Building Single purpose buildings Ground lease: Arrangement where business leases raw land from owner on a long-term basis and then builds its own specialized facilities. ⚫ Lease usually runs a few decades or more. ⚫ Long lease allows tenant time to recoup cost of building the facility. © 2021 Rockwell Publishing 12 21  Property Management Instructor Materials Types of Industrial Property Single-tenant vs. multi-tenant buildings Single-tenant property may not be most profitable for landlord. ⚫ Particularly in older and oddly shaped buildings. ⚫ Owner may get higher rents by using parts of building in desirable area (along a sidewalk, for example) for a restaurant. ⚫ Neighborhood and other tenants benefit from services of various small tenants. © 2021 Rockwell Publishing 13 Types of Industrial Property Single-tenant vs. multi-tenant buildings Developers sometimes build new multi-tenant industrial buildings. ⚫ Tend to be small, under 100,000 square feet. ⚫ Usually contain a few tenants engaged in compatible uses. © 2021 Rockwell Publishing 14 Types of Industrial Property Separate parcel vs. industrial park Last classification distinguishes between building on its own separate parcel and those in industrial parks. Industrial park: Preplanned development that contains industrial buildings and sometimes office buildings as well. ⚫ Sometimes called business parks. © 2021 Rockwell Publishing 15 22  Chapter 13: Managing Industrial Property Types of Industrial Property Separate parcel vs. industrial park Industrial parks usually organized as subdivisions. ⚫ Owner or developer subdivides land before construction. ⚫ One owner may own and manage entire park, leasing out buildings or parts of buildings to tenants. © 2021 Rockwell Publishing 16 Types of Industrial Property Separate parcel vs. industrial park Alternatively, industrial parks may use condominium form of ownership. Owners of various buildings form owners association that: ⚫ votes on issues affecting park ⚫ uses dues to cover park operations ⚫ hires property manager to oversee park © 2021 Rockwell Publishing 17 Summary Types of Industrial Property – Industrial property – General purpose buildings – Special purpose buildings – Single purpose buildings – Sale-leaseback – Ground lease – Industrial park © 2021 Rockwell Publishing 18 23  Property Management Instructor Materials Management Planning Management planning for industrial property involves using various data sources to complete analyses of: ⚫ region ⚫ neighborhood ⚫ property ⚫ market ⚫ alternatives © 2021 Rockwell Publishing 19 Regional Analysis Demographics Industrial managers want to know about: ⚫ unemployment and turnover rates ⚫ education and skills training ⚫ income ⚫ average age ⚫ major occupations ⚫ unionization (some businesses) Most important to labor-oriented industries employing many people. © 2021 Rockwell Publishing 20 Regional Analysis Transportation Transportation study evaluates quality of region’s: ⚫ roads ⚫ airports ⚫ seaport ⚫ railroad infrastructure It should also give estimate of future condition of transportation in area. © 2021 Rockwell Publishing 21 24  Chapter 13: Managing Industrial Property Regional Analysis Utilities Some industries (manufacturers) use huge amounts of water and electricity. Manager should assess: ⚫ whether local utility companies can service needs of potential tenants ⚫ utility rates © 2021 Rockwell Publishing 22 Regional Analysis Utilities Footloose industry: Industry that doesn’t need to locate near cheap utilities, natural resources, or transportation points. ⚫ Examples: call centers, research facilities. ⚫ May choose location based on quality of life: ⚫ climate, housing costs, recreation, schools, crime rates © 2021 Rockwell Publishing 23 Regional Analysis Tax rates Manager should look at state and local tax rates. ⚫ Federal rates not as important because they usually don’t vary from location to location. Three categories of taxation: ⚫ business taxes ⚫ property taxes ⚫ personal income taxes © 2021 Rockwell Publishing 24 25  Property Management Instructor Materials Tax Rates Business taxes Business taxes refers to: ⚫ corporate income and business gross receipts taxes ⚫ states levy taxes: 2.5%–11.5% ⚫ seven states levy gross receipts tax: Tax with no deductions for operating expenses ⚫ employment taxes (payroll taxes) ⚫ sales tax (on goods and services) © 2021 Rockwell Publishing 25 Tax Rates Property taxes Real property owners pay annual tax based on value of property. ⚫ Levied on owner, not tenant, but most owners pass taxes on to tenants. ⚫ Some states also tax personal property (inventory, equipment). ⚫ Tax rates vary from state to state. ⚫ Counties and local governments may also impose property taxes. © 2021 Rockwell Publishing 26 Tax Rates Personal income taxes Many states charge personal income tax. ⚫ Rates vary considerably. ⚫ Business owner may choose to locate in state with lower income tax. © 2021 Rockwell Publishing 27 26  Chapter 13: Managing Industrial Property Regional Analysis State and local business incentives Many state and local governments court industrial business by offering tax relief and other incentives. Goal is to get industry to stay (or relocate to area) to increase: ⚫ revenue (through taxes) ⚫ job opportunities © 2021 Rockwell Publishing 28 Regional Analysis State and local business incentives Tax incentives include tax relief offered to new or expanding businesses. Example: reducing property taxes for certain period of time. © 2021 Rockwell Publishing 29 Regional Analysis State and local business incentives Government may offer financing incentives for larger industrial development projects. ⚫ Especially true in economically depressed areas. ⚫ Usually takes form of tax-exempt industrial revenue bonds. © 2021 Rockwell Publishing 30 27  Property Management Instructor Materials Regional Analysis State and local business incentives Regulatory incentives include: ⚫ easing zoning requirements ⚫ temporary compromise on environmental requirements ⚫ job training to help industry get qualified workers © 2021 Rockwell Publishing 31 Regional Analysis Federal business incentives Federal government offers various tax incentives to industries favored by public policy, such as alternative energy providers. © 2021 Rockwell Publishing 32 Regional Analysis Federal business incentives Another form of federal incentive is the foreign trade zone (FTZ): Geographical area where government provides tax relief to importing and exporting industries. ⚫ Every state has at least one; coastal states may have several. ⚫ Considered outside U.S. Customs. ⚫ Companies can avoid paying duties and local taxes until ready to sell or use goods. © 2021 Rockwell Publishing 33 28  Chapter 13: Managing Industrial Property Neighborhood Analysis Zoning Most cities and counties have at least two or three classes of industrial zones, such as: ⚫ light industrial (clean assembly, research and development) ⚫ medium industrial (warehouses, woodworking, construction yards) ⚫ heavy industrial (refining, cement plants, plastics, and other manufacturing) © 2021 Rockwell Publishing 34 Neighborhood Analysis Zoning Heavy industrial zones may allow lighter industrial uses (such as warehousing) in same zone. Zoning board may offer variances. © 2021 Rockwell Publishing 35 Neighborhood Analysis Transportation access Evaluating local access to transportation is important part of neighborhood analysis, just as overall transportation picture is in regional analysis. ⚫ Access to freeway, especially for trucks. ⚫ Fixing road problems can be expensive. © 2021 Rockwell Publishing 36 29  Property Management Instructor Materials Neighborhood Analysis Municipal services Municipal services include: ⚫ waste disposal (especially for hazardous materials) ⚫ type of materials ⚫ volume of materials ⚫ cost ⚫ firefighting (especially important when flammable materials are used) ⚫ police protection © 2021 Rockwell Publishing 37 Property Analysis Building Building is main part of property analysis, and includes a look at: ⚫ square feet ⚫ ceiling height and structural requirements ⚫ plumbing and wiring capacity ⚫ fire safety systems ⚫ shipping and receiving facilities ⚫ parking © 2021 Rockwell Publishing 38 Building Square feet Size of building is very important to industrial tenants. Manager must include figure for: ⚫ rentable square footage ⚫ square footage enclosed by exterior walls + share of common areas ⚫ usable square footage ⚫ space tenant can actually occupy © 2021 Rockwell Publishing 39 30  Chapter 13: Managing Industrial Property Building Ceiling height/structural requirements Most manufacturers prefer single-story, high- ceilinged buildings. Heavy equipment and stored goods require sturdy floor. ⚫ Engineer can provide manager with floor’s maximum load. © 2021 Rockwell Publishing 40 Building Plumbing and wiring capacity Some industries require heavy-duty utility service, such as three-phase electrical. Regional analysis evaluates ability of utility companies to provide the necessary service; property analysis addresses capacity of plumbing and wiring on premises. © 2021 Rockwell Publishing 41 Building Fire safety systems Fire safety analysis looks at: ⚫ type of automatic fire detection in place ⚫ sprinkler system mandatory in most commercial buildings ⚫ how fireproof building is ⚫ smoke and heat vents in roof ⚫ exterior fire doors © 2021 Rockwell Publishing 42 31  Property Management Instructor Materials Building Shipping and receiving facilities Manager should consider presence of: ⚫ covered loading docks ⚫ drive-in areas for loading/unloading Loading and unloading areas can be added if needed by tenant. © 2021 Rockwell Publishing 43 Building Parking Parking analysis looks at: ⚫ number of parking spaces ⚫ parking security ⚫ parking lot access © 2021 Rockwell Publishing 44 Market Analysis Finding comparables for light industrial and warehouse space is fairly easy. More difficult to find comparables for special purpose and single purpose buildings. Manager may have to: ⚫ look outside county or state ⚫ use building’s own rental history to guide evaluation © 2021 Rockwell Publishing 45 32  Chapter 13: Managing Industrial Property Analysis of Alternatives Manager considers: ⚫ whether adding new features is possible and cost-effective ⚫ option of setting a lower rent rather than adding new features © 2021 Rockwell Publishing 46 Analysis of Alternatives Possible changes may include: ⚫ cosmetic (landscaping, new paint) ⚫ increasing/decreasing or refinishing parking areas ⚫ upgrading windows and wiring ⚫ improving freight facilities ⚫ changing use (if manufacturing needs have changed, building may be better used as warehouse) © 2021 Rockwell Publishing 47 Summary Management Planning – Sources of data – Regional analysis – Footloose industries – Gross receipts tax – Foreign trade zones – Heavy duty utilities – Fire safety systems © 2021 Rockwell Publishing 48 33  Property Management Instructor Materials Marketing Industrial Property Marketing industrial property usually involves: ⚫ leasing agents ⚫ property listings ⚫ prequalifying prospective tenants © 2021 Rockwell Publishing 49 Marketing Industrial Property Using leasing agents Leasing agent (not property manager) usually handles marketing and leasing of industrial property. ⚫ Sometimes called industrial brokers. ⚫ Better at finding tenants for specialized properties. ⚫ Managers of smaller properties may handle marketing/leasing themselves. © 2021 Rockwell Publishing 50 Marketing Industrial Property Property listing Industrial property listing should include: ⚫ location ⚫ photo or two (street view, aerial for large properties) ⚫ basic information about property ⚫ square footage, ceiling height, power, zoning, parking © 2021 Rockwell Publishing 51 34  Chapter 13: Managing Industrial Property Marketing Industrial Property Prequalifying tenants/showing property Manager or leasing agent should prequalify prospective tenant before showing property. Prequalification involves: ⚫ financial analysis ⚫ evaluation of business operations ⚫ to see if business is right for property ⚫ to tailor showing © 2021 Rockwell Publishing 52 Leasing Industrial Property Leasing team often handles lease negotiation for larger industrial properties. ⚫ Team: leasing agent, manager, owner, lawyer, accountant, and sometimes environmental expert. © 2021 Rockwell Publishing 53 Leasing Industrial Property Lease provisions Important industrial lease provisions include: ⚫ term ⚫ rent and pass-throughs ⚫ use provisions ⚫ inspections ⚫ insurance ⚫ environmental matters © 2021 Rockwell Publishing 54 35  Property Management Instructor Materials Lease Provisions Term Lease terms often ten years or longer. ⚫ Helps parties recoup investments. ⚫ More generic properties (warehouses, for example) may have shorter lease terms. ⚫ Single purpose buildings may have much longer leases: ⚫ hard for landlord to find new tenant ⚫ hard for tenant to find new property © 2021 Rockwell Publishing 55 Lease Provisions Rent and pass-throughs Industrial leases usually fully net: landlord passes property taxes, insurance, and maintenance costs on to tenant. Industrial gross lease: True gross lease only during first year (called base year), when rent includes some or all of landlord’s operating expenses. ⚫ Subsequent years: tenant pays increases to operating expenses above base year. © 2021 Rockwell Publishing 56 Rent and Pass-Throughs Square footage Rent in industrial lease usually based on square footage. If rent based on square footage, method of measuring should be stated in lease. © 2021 Rockwell Publishing 57 36  Chapter 13: Managing Industrial Property Rent and Pass-Throughs Escalation clause Most industrial leases contain rent escalation clause. Rent increase is either: ⚫ pre-set dollar amount each year, or ⚫ amount based on rate of inflation, or ⚫ fixed percentage per year. © 2021 Rockwell Publishing 58 Lease Provisions Use restriction Use restriction: Limits tenant’s use of property. ⚫ Example: clause in warehouse lease may limit property’s use to “warehouse uses— no manufacturing or use of toxics.” © 2021 Rockwell Publishing 59 Lease Provisions Inspections Inspections help ensure that tenant complies with: ⚫ use restrictions in lease ⚫ environmental, zoning, and other laws © 2021 Rockwell Publishing 60 37  Property Management Instructor Materials Lease Provisions Insurance Lease should state which types of insurance tenant will obtain, and in what amounts: ⚫ pollution liability ⚫ property and casualty ⚫ workers’ compensation ⚫ boiler and machinery ⚫ business interruption ⚫ commercial automotive ⚫ commercial general liability © 2021 Rockwell Publishing 61 Lease Provisions Insurance Lease should require tenant to provide proof of insurance each year. Lease may require tenant to get insurance from a company with a minimum rating grade. ⚫ Prevents tenant from purchasing cheap insurance from unreliable company. © 2021 Rockwell Publishing 62 Summary Marketing/Leasing – Industrial brokers – Prequalifying industrial tenants – Industrial gross lease – Base year – Use restriction © 2021 Rockwell Publishing 63 38  Chapter 13: Managing Industrial Property Operations and Reporting Maintenance Responsibility for industrial property maintenance varies based on property type. ⚫ Multi-tenant industrial park: manager responsible for common areas, including roof and exterior. ⚫ Expenses billed to tenants on pro rata basis as CAM charges. ⚫ Single tenant: tenant may handle, especially in single purpose building. © 2021 Rockwell Publishing 64 Operations and Reporting Security Industrial property poses unique security issues: machinery and warehouse contents may be attractive to thieves. Manager should: ⚫ consult with experts about alarm systems ⚫ make sure tenants in multi-tenant properties aren’t leaving loading or other doors open © 2021 Rockwell Publishing 65 Operations and Reporting Reports to owner In addition to operating and financial reports to owner, manager may also need to report on any environmental damage. If there are problems, manager must report clean-up efforts to government, and should also report to owner. © 2021 Rockwell Publishing 66 39  Property Management Instructor Materials Summary Operations and Reporting – Maintenance – Security – Reports to owner © 2021 Rockwell Publishing 67 40